Question

Under the terms of his salary agreement, president Steve Walters has an option of receiving either an immediate bonus of $77,000, or a deferred bonus of $98,000 payable in 10 years.
Ignoring tax considerations and assuming a relevant interest rate of 4%, which form of settlement should Walters accept?

Answer 1

Answer:

Immediate bonus of $77,000

Explanation:

Given the following

Immediate bonus = $77,000

Differed bonus = $98,000

Rate = 4%

Duration = 10

$66,205 deferred bonus

$77,000 immediate bonus

Calculating the differed bonus

We have

=$98,000 x 0.67556= $66,205

Present value of deferred bonus

= $66,205

He has a choice of collecting either an immediate bonus of $77,000, or collect a deferred bonus of $66,205 payable in 10 years

The best option for Walters is to collect an immediate bonus now

Answer 2

Answer:

$66,205 deferred bonus

$77,000 immediate bonus

Explanation:

$98,000 discounted at 4% for 10 years

=$98,000 x 0.67556= $66,205

Present value of deferred bonus $66,205

Walters has an option of receiving either an immediate bonus of $77,000, or a deferred bonus of $66,205 payable in 10 years

Therefore Walter should accept the bonus of $77,000 now.